THE FED'S HIGH-WIRE "TIGHT ROPE WALK - EXPECT IT TO BE SCARY!

PROBLEM WITH FED TIGHTENING:

  • Credit potentially will contract, possibly driving the US into a recession or worse.

PROBLEMS WITH FED NOT TIGHTENING:

  • A destabilizing asset price bubble could possibly get out of control (near if not there now) which would wreck the banking sector (once again!)

FED POLICY SHIFT ANNOUNCEMENT - QUANTITATIVE TIGHTENING (QT)

  • Fed will reverse Quantitative Easing 'later this year',
  • Schedule suggests a $1T balance sheet shrinkage (~22%) by YE 2019.

 

This radical removal of Liquidity from the financial markets would very likely cause:

  • Interest Rates to Rise Sharply,
  • Credit to contract,
  • Asset Prices to Crash,
  • Economy to enter a severe Recession (or worse)

WHY WOULD THE FED REALLY NEED TO DO THIS

  1. Preparation of some buffer for the next Recession, which is now over die historically,
  2. Front run a new Trump appointed Fed Chairperson ho may be forced politically to avoid QT,
  3. Stop current asset price bubble from setting off a systemic financial crisis.

THE PROBLEM

Credit growth is too weak even though asset prices are very high